A Quality Income Portfolio For 2012

by: Michael Connellan

Since 1931, the Value Line Investment Survey has made huge amounts of stock market data available to investors in a concise, useful manner. Warren Buffet said of the VLIS that it's "An incredible value. I don't know of any other system that's as good.". With that in mind, let's test their system in 2012. To do so we identified a number of key screens to filter the VLIS' 1,700 stocks.

These screens consisted of two levels. For the first level we focused on broad criteria: Financial Strength of "A++", VLIS' highest rating; Safety of "1", also the highest rating on a 1-5 scale; and Timeliness of "1, 2 or 3" putting the selections in the top half at least for year-ahead performance.

At the second level our screens were more focused on specific individual criteria.The table below specifies the criteria:

Minimum Maximum
Return on Common Equity 10%
Projected Sales Growth Rate 3%
Projected EPS Growth Rate 3%
Current Dividend Yield 3%
Projected Dividend Growth Rate 4%
Projected 3-5 Year Annual Total Return 12%
Projected 3-5 Year Price Change 25%
Free Cash Flow $1
Current PE Ratio 15
Beta 1.2

Although several of the individual criteria do not appear too stringent, the combination filtered out many fine, borderline businesses. The three general screens coupled with the 10 specific criteria listed above combined to produce a short list of just 12 very high quality companies. Interestingly, four are defense companies, and investors might want to reduce the list to 10 by selecting 2 from among the 4 defense companies. If income and dividend growth is important then Lockheed Martin stands out with its 5.07% current yield and 15% expected dividend growth rate.

Listed below are the selected 12 companies:



Projected 3-5 Year

Price Change


PE Ratio

Intel INTC 3.50% 129% 9.49
Microsoft MSFT 3.10% 94% 9.22
PepsiCo PEP 3.17% 85% 14.51
Sysco SYY 3.70% 71% 13.91
Abbott Labs ABT 3.45% 71% 11.36
Northrop Grumman NOC 3.63% 51% 8.23
General Dynamics [[GD] ] 3.02% 51% 8.74
Raytheon RTN 3.88% 51% 9.23
Johnson & Johnson JNJ 3.50% 42% 13.01
Lockheed Martin LMT 5.07% 39% 10.15
Novartis NVS 3.61% 37% 11.58
ConocoPhillips COP 3.90% 36% 8.01

This portfolio would provide a current dividend yield of 3.62% [assuming equal investments in each] growing at an expected rate of 9% annually, with reasonable 3-5 year expected price appreciation, and PE ratios consistently at or below the market averages. Each is financially strong, and investors could go to bed each night knowing their companies would be there in the morning, and survive and prosper even in difficult economic conditions. Finally, with a composite Beta of just 0.80, the volatility of the portfolio would be significantly less than the S&P 500.

Will this portfolio beat the market in 2012? In January 2013 we'll look back and see.

Disclosure: I am long ABT, GD, INTC, LMT, MSFT, NVS, PEP.

Additional disclosure: The author has no affiliation with Value Line Investment Survey and receives no compensation of any kind from VLIS.

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